Sept. 20, 2012
Senate Banking Hearing Highlights Dangers of High-Frequency Trading, Underscores Need for Financial Speculation Tax
Note: The Senate Committee on Banking, Housing, and Urban Affairs Subcommittee on Securities, Insurance, and Investment is holding a hearing at 10 a.m. today titled, “Computerized Trading: What Should the Rules of the Road Be?” in 538 Dirksen Senate Office Building.
WASHINGTON, D.C. – The implementation of a financial speculation tax could help counteract both the predatory practices and the instability that are rampant in the market as a result of high-frequency trading, Micah Hauptman, financial campaign coordinator for Public Citizen said in written testimony submitted to lawmakers today.
A miniscule financial speculation tax on the sale or transfer of stocks, bonds and derivatives, such as one called for by the Wall Street Trading and Speculators Tax Act (S. 1787, H.R. 3313), introduced by U.S. Sen. Tom Harkin (D-Iowa) and U.S. Rep. Peter DeFazio (D-Ore.), would “throw sand in the gears” of high-frequency trading operations by making their activities less profitable, ultimately reducing the likelihood of such operations distorting markets, Hauptman said.
High-frequency traders often pay exchanges for the ability to receive information at a faster rate than other market players. They are then able to exploit these advantages using high-powered computer technology to capture profit. Just last week, the New York Stock Exchange agreed to pay a $5 million settlement to the Securities and Exchange Commission for providing such an unfair advantage.
According to the testimony, high-frequency trading carries several risks, including potential harm to traditional investors such as those holding mutual funds. High-frequency traders exploit technology to gain an advantage over traditional investors, sometimes even manipulating the prices of equities by making millions of false transactions. A financial speculation tax could protect the millions of investors whose retirement savings are held in such investment vehicles.
Another serious concern highlighted in the testimony is high-frequency trading’s potential for instability. Events such as the May 2012 “flash crash” and the more recent Knight Capital debacle show the potential for danger when the complex computer algorithms used in high-frequency trading go awry. A financial speculation tax would slow down high-frequency operations to a more controllable level.
Also, a financial speculation tax has the potential to raise hundreds of billions of dollars. For example, the nonpartisan Joint Committee on Taxation scores the Harkin-DeFazio bill as generating more than $350 billion over 10 years. In this time of fiscal hardship, the revenue that a financial speculation tax could raise must not be overlooked.
“High-frequency trading contributes to a misallocation of resources, encouraging short-term speculation while stifling productive long-term investment,” said Hauptman. “We urge Congress to consider a financial speculation tax. With altered incentives, short-term speculative trading would decline and traditional long-term investment would flourish.”
To read Hauptman’s full testimony, visit https://www.citizen.org/sites/default/files/hauptman-testimony-on-computerized-trading.pdf.